MEDNAX, Inc. (NYSE: MD) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 20, 2020. The filing describes a physician-services business spanning neonatal, anesthesia, maternal-fetal, radiology and pediatric specialties. It reports MedData as discontinued operations following its sale in October 2019.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Net revenue | $3,513.5 million | $3,454.8 million |
| Operating income (loss) | $(1,136.0) million | $431.8 million |
| Income (loss) from continuing operations | $(1,150.1) million | $258.6 million |
| Net income (loss) | $(1,497.7) million | $268.6 million |
| Adjusted EBITDA from continuing operations | $500.8 million | $527.7 million |
| Adjusted diluted EPS from continuing operations | $3.38 | $3.55 |
| Cash from continuing operating activities | $338.5 million | $274.1 million |
- Revenue rose 1.7%. Same-unit revenue increased 2.2%, reflecting 1.2% growth in patient-service volumes and 1.0% from reimbursement-related factors. Administrative fees were $396.8 million, up from $363.4 million.
- GAAP operating margin was (32.3)%, principally due to a $1,449.2 million non-cash goodwill impairment and $95.3 million of transformation and restructuring expenses. Excluding those items, management reported operating income of $408.5 million and an 11.6% margin.
- Adjusted EBITDA declined 5.1% and adjusted EPS declined from $3.55 to $3.38. Interest expense increased to $119.4 million from $88.8 million.
- Fourth-quarter revenue was $905.4 million; operating income was $64.8 million, continuing-operations income was $33.0 million, and net income was $9.3 million.
- Cash and cash equivalents were $112.8 million; working capital was $189.7 million. Continuing-operations operating cash flow was $338.5 million, and capital expenditures were $31.9 million.
- Debt principal totaled $1.75 billion, all fixed-rate: $750 million of 5.25% notes due 2023 and $1.0 billion of 6.25% notes due 2027. No revolver borrowings were outstanding; $1.2 billion was available under the revolving facility.
Material changes and unusual items
- The company recorded a $1.45 billion goodwill impairment in the third quarter, nearly all associated with anesthesiology. Management cited a lower share price, a change in reporting-unit structure and valuation assumptions including a company-specific risk premium. A 1% discount-rate change could alter the charge by an estimated $75–$90 million.
- MedData was sold for $249.7 million in cash proceeds, net of specified adjustments, plus contingent consideration of up to $50 million. The 2019 discontinued-operations loss was $347.6 million, including impairment charges and a preliminary sale loss; final proceeds and the sale result remained subject to valuation and working-capital adjustments.
- Transformation and restructuring costs included $65.7 million of external consulting, $18.0 million of severance and $11.6 million of contract termination and related costs. Cash outflows for these activities were $69.0 million. The initiatives were expected to continue through at least 2020.
- The company completed nine physician-practice acquisitions for approximately $112 million in cash consideration. It said it expected modest acquisition activity in 2020, focused mainly on radiology, neonatology and pediatric subspecialties.
- Share repurchases totaled $145.3 million in 2019; $107.2 million remained under the $500 million authorization at year-end. No cash dividends were paid in 2019.
Outlook, commentary and risks
- No numerical revenue or earnings guidance is provided. Management said operating cash, available credit and expected operating cash generation should fund working capital, planned acquisitions, capital spending, restructuring costs and contractual obligations for at least the next 12 months.
- Management cited growth in same-unit services and administrative fees, while noting contract non-renewals, higher clinician compensation and unfavorable professional-liability claims experience. Anesthesia cases fell to 1.79 million from 1.84 million; NICU admissions rose to 114,864 from 113,485.
- UnitedHealthcare unilaterally terminated multiple affiliated-practice contracts across four states, covering anesthesia, neonatology and maternal-fetal services. Reimbursement pressure, Medicaid and ACA changes, surprise-billing restrictions, payor audits and contract renewals are material risks. Contracted managed care represented 69% and government programs 24% of net revenue mix.
- Other highlighted risks include declining U.S. births, physician recruiting and retention, malpractice reserve uncertainty, cybersecurity and technology implementation, acquisition integration, and geographic concentration (Texas represented about 20% of revenue; five states about 52%). Starboard Value nominated a majority slate of directors for the 2020 annual meeting.
- The company reported that its financial statements received an unqualified audit opinion and that internal control over financial reporting was effective. The securities class action was dismissed with prejudice in February 2020; a related derivative action remained pending, with outcome uncertain.
Important facts for investors to verify
- Whether underlying margins and adjusted EBITDA stabilize after the impairment and restructuring period, and whether the stated adjustments are useful indicators of recurring performance.
- MedData’s final sale proceeds, contingent consideration value and final loss on sale.
- Progress and realized savings from restructuring, alongside continuing clinician compensation and malpractice costs.
- Effects of UnitedHealthcare contract terminations and any further payor, hospital-contract or reimbursement changes on volumes, rates and collections.
- Debt-service capacity, covenant compliance and liquidity under weaker operating or collection conditions; professional-liability reserves were $271.8 million at year-end.
- Execution of 2020 acquisition plans, technology projects and the response to the shareholder activist campaign.